Tuesday, 1 May 2018

Updates from the Banking Sector

Owing to the dynamics of the academic year, there has been
somewhat of a lull recently here in Financial
Regulation Matters, so to get up to speed a round-up of developments within
the banking sector seems like a good place to start. There have been a number
of developments since the last post, so today we will work our way through them
as efficiently as possible; the underlying sentiment is that the developments
portray a sector that is consistently changing since the Crisis, with a number
of aspects of that said Crisis continuing to play out (rather unsurprisingly).

We start with our old friends RBS, who have taken up a large
amount of space in Financial Regulation
Matters, mostly on account of their remarkable development since the
Crisis. Past posts have focused on the unique
relationship that continues between the bank and the government (on account
of its ownership of the bank), its terrible
performance (alongside the FCA) in relation to its treatment of SMEs, and
also its plans to restructure
its business in light of its troubles. Late last week it was announced that
the bank had recorded
nearly £800 million in profits (£1.2 billion in operating profit), which
was pushed in the business media as an extremely positive sign for the bank in
its quest to return to private ownership. However, whilst embattled CEO Ross
McEwan was quick to talk up the impact of these results, the reality is that
the results mask the impending penalties that lurk just over the horizon; RBS
is facing penalties for its performance in relation to Payment Protection
Insurance mis-selling (a continuing case that may come to a conclusion soon – more later), the actions of the ‘Global
Restructuring Unit’, and its performance in the Financial Crisis, particularly
with regards to the selling of U.S.-based securities. On that point, in March
it was being touted that, perhaps, ‘within
weeks’, the case could be concluded by the US DoJ (with some political
assistance from the British Government) which has not been the case – the bank
is potentially facing upwards of $10 billion in fines which would have a massive
effect upon this perceived upward trajectory. Yet, with the British Government
essentially lobbying on the bank’s behalf, news today that the bank
is closing 162 branches with a potential loss of 800 jobs is testament to
the dynamic where the assistance of the British taxpayer is considered
secondary to the health of the bank. There is a strong argument to say that
this is correct, in that the bank’s health will see it return to private
ownership and contribute to a healthier banking sector in the long term.
However, in the short-term, workers are being laid off during difficult
economic times, which is clearly a negative aspect. It is clearly a difficult
dynamic to judge, but the clear availability of a public safety-net obviously
does not factor into the industry’s thinking, which as a sentiment raises more
questions about the role of these
too-big-to-fail institutions within wider society.

Meanwhile, Barclays is experiencing similarly changeable
times, although of a different nature to that of RBS. We spoke previously about
Barclays’ boss Jes Staley and the investigation into his conduct with regards
to the treatment
of a whistleblower, and recently Staley received a number of pieces of good
news. Staley escaped that FCA
investigation with only a modest fine (rather predictably) and then
presided over financial results that show the bank’s investment arm is outperforming
the performance of its rivals, something which he has been championing in
response to the entrance of an activist investor who, to all intents and
purposes, would like to reduce the focus upon investment banking. Yet, all is
not well in Barclays, with news today that protesters have interrupted the bank’s
AGM to protest against the bank’s continuing
investment of fossil fuel-related projects. The bank has sought to react to
the protests by stating that they are ‘considering
our position to deal with these kinds of matters’, although that is
unlikely to stem the protests. The bank’s investment within fracking projects
close to home will likely result in more pressure, as recent calls for the bank
to commit to its pledges to divest from such projects have so far resulted in
very little action.

However, one aspect that Barclays avoided was the
I.T.-related disaster that has seen TSB brought sharply into the limelight. The
bank is currently in its second week of being affected by I.T. issues that had
been warned
about for over a year, with the height of the crisis culminating in almost 2
million TSB customers being locked out of their online accounts. Despite
the bank attempting to stem the bleeding by drafting
in I.T. experts, the leaders of TSB are continuing to come under pressure
for the performance of the bank, with CEO Paul Pester being summoned
by MPs to explain the fiasco. The bank’s compensation bill is rumoured to
potentially run into the tens of millions of pounds, and there are questions
currently being raised regarding whether Pester will receive
his bonuses. Consequently, the bank is facing a real crisis, because the
competition within this specific marketplace continues to increase, those
facing crises of this magnitude find themselves in real danger moving forward.

Finally, there has been developments recently for Lloyds,
specifically as they now own HBoS. The criminal investigation into the conduct
of a so-called ‘rogue’ unit that seemingly culminated in the imprisonment
of a number of associated people is potentially being re-launched by the National
Crime Agency – the NCA is currently deciding whether a new ‘full-blown
criminal investigation’ is warranted in relation to fraud undertaken by the
bank, specifically for instances that fell outside of the original police
investigation. The proposed investigation comes after a number of allegations
were brought forward regarding fraud, but it is also interesting to see how the
NCA operates in this particular scenario because of the political
battles taking place regarding the superiority of the NCA and the Serious Fraud
Office – it will be interesting to examine, but this may be the opportunity
the NCA needs to establish itself as the eminent department in the fight
against fraud.

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